The recent flattening of the US yield curve indicates that long-term inflation expectations have subsided which in turn could mean that investors started repricing their GDP growth expectation. As the US yield curve recently produced some local inversions, global markets have turned nervous amid speculations about the Fed’s future actions and the threat of the US recession in the years to come.
So far, the Russian markets have been rather moderately affected by these events and demonstrated no clear change in trends, as bond, equity and currency markets fluctuated around the levels seen in the past couple months. Hence the question about what the Russian regulators may do with regard to the key rate and the announced return to FX purchases.
The acceleration of Russia’s inflation in recent months amid a weaker ruble was caused by the regulators’ activity on the FX market. It is likely that the CBR is going to hike the key rate in mid-December. Given that the system will be awash with liquidity at year-end due to the usual December spending spree, this rate hike may have a limited impact on the bond yields. A seasonal liquidity contraction in January will be offset by the FX buying program, which is likely to be resumed in the second half of January.

One of the most interesting trends on the OFZ market in 2018 was the increased presence of Russian institutional investors, primarily non-state pension funds. These investors largely helped the market almost fully offset the outflow of foreign investors. Moreover, they provided a great part of demand for Minfin's new issues in the first half of the year. Some untapped demand from Russian institutional investors is still there, but it is clearly insufficient to match the government's aggressive borrowing plans for 2019. It is highly likely that the next year's OFZ issuance program may be cut.

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